Morgan Stanley Says Kospi Selloff Is a Breather, Not a Breakdown; Bull-Case Target 10,500

Morgan Stanley said the sharp selloff in South Korean stocks on June 23 was "more of a breather than a breakdown" and projected the Kospi could rise to 10,500 in a bull-market scenario.

In a report published on June 23, the bank said the Kospi fell 10% that day, with semiconductor makers and artificial intelligence-related stocks leading the decline. It attributed the drop to a combination of factors, including weakness in Micron and policy comments that were not supportive.

The report said the Kospi underperformed comparable markets, falling more sharply than Japan's Topix, down 1.3%, and Taiwan's Taiex, down 2.6%, due to South Korea's heavy exposure to memory semiconductors and the impact of policy-related news.

Morgan Stanley said the Korean market's steeper decline mainly reflected fatigue after a prolonged rally.

Still, it said the fundamentals for memory chipmakers and related AI stocks remain solid because those products continue to be a key bottleneck as supply struggles to keep pace with surging AI demand.

The bank said it does not view the correction as the start of a bear market. Instead, it described the move as a necessary pause while investors wait for clearer signals on policy direction and the AI investment story.

The report said investors are now watching the market reaction after shareholder meetings at Micron and Nvidia, as well as second-quarter earnings from South Korean semiconductor companies. Morgan Stanley said it remains positive on chipmakers, related holding companies and adjacent technology stocks.

Morgan Stanley set a base-case target of 9,000 for the Kospi. In a bull-case scenario, it said the index could reach 10,500, while in a bear-case scenario it could fall to 6,500.

The bank also said market volatility is likely to remain elevated for now. The report said the market has entered a phase of rising volatility, with broader product offerings and a wider investor base increasing liquidity while also amplifying price swings.

It projected that after the correction, the Kospi will continue to post sharp swings.

Morgan Stanley also recommended a barbell strategy for portfolios, with allocations split between high-growth, high-risk assets and defensive stocks while keeping relatively lower exposure to stocks in the middle.

The report said investors should maintain exposure to growth stocks while broadening allocations to relatively defensive sectors such as financials, defense, healthcare and premium consumer goods.

Choi Su-jin, Hankyung.com reporter naive@hankyung.com